Futures Contract in Indian Markets: Margin, Lot Sizes and Tax

What a Futures Contract Actually Is

A futures contract is a standardised legal agreement, traded on a recognised exchange, to buy or sell a specified quantity of an underlying asset at a price fixed today, for settlement on a defined expiry date. In India these trade on the NSE and BSE under SEBI regulation. The key word is standardised: the quantity (lot size), the tick size, the expiry calendar and the settlement method are all defined by the exchange, so you only negotiate price. Unlike an options contract, a future carries a firm obligation. The buyer must take the position and the seller must deliver, there is no walking away by forfeiting a premium.

When you buy one Nifty future, you are not paying the full contract value. You post a margin and control a much larger notional exposure. With Nifty around 23,500 and a lot size of 65, one futures lot represents a notional value of roughly Rs 17.6 lakh, yet the margin needed to carry it is often around Rs 1.3 lakh to Rs 1.6 lakh. That gap is leverage. It magnifies both gains and losses, which is why futures are powerful for hedgers and dangerous for the undisciplined. All figures here are illustrative and change daily.

Two distinct participants meet in this market. Hedgers already own or plan to own the underlying and use futures to lock in a price and reduce risk. Speculators and traders take directional views to profit from price moves and provide the liquidity that lets hedgers enter and exit easily. Note that being a market speculator in everyday language does NOT mean your income is taxed as speculative. That distinction is explained in detail below and is one of the most misunderstood points in Indian F&O taxation.

How Futures Work: Margin, Mark to Market and Expiry

Once you take a futures position, three mechanics govern your account every day. First, margin: the exchange collects SPAN margin (calculated from worst-case risk scenarios) plus an exposure margin upfront. Your broker blocks this from your trading account. Second, mark to market (MTM): at the end of every trading day the exchange revalues your open position against the daily settlement price and either debits or credits the difference in cash. You do not wait until expiry to feel profit or loss, it flows daily.

Third, expiry. Index futures (Nifty, Bank Nifty, FinNifty) settle monthly on the last Thursday of the contract month, or the previous trading day if that Thursday is a holiday. The exchange always keeps the current month, next month and far month contracts available, so you can roll a position forward. While weekly expiries are a feature of index options, the main index futures contracts are monthly. If your position is still open at expiry, index futures are cash settled at the final settlement price, while single-stock futures go to physical settlement, meaning actual delivery of shares against the position.

A Fully Worked Nifty Futures Example (Illustrative)

Suppose on 1 of the month you expect Nifty to rise and you buy 1 lot of Nifty futures at 23,500. The lot size is 65, so your notional exposure is 23,500 multiplied by 75, which is Rs 17,62,500. Your broker blocks roughly Rs 1,40,000 as margin. The figures below are illustrative and not a promise of any outcome.

• Entry: Buy 1 lot Nifty futures at 23,500. Notional Rs 17,62,500. Margin blocked about Rs 1,40,000.
• Scenario A, market rises: You exit at 23,800. Gross profit is (23,800 minus 23,500) multiplied by 75, which is 300 times 75 equals Rs 22,500.
• Scenario B, market falls: You exit at 23,250. Gross loss is (23,500 minus 23,250) multiplied by 75, which is 250 times 75 equals Rs 18,750.
• Leverage check: In Scenario A, Rs 22,500 profit on about Rs 1,40,000 margin is roughly a 16 percent return on margin from a price move of just 1.28 percent. The same leverage works against you in Scenario B.

Now apply realistic costs to Scenario A. On the sell leg, STT on futures is 0.02 percent of the sell turnover. Sell turnover is 23,800 times 75 equals Rs 17,85,000, so STT is about Rs 357. Add discount-broker brokerage of roughly Rs 20 per leg (Rs 40 round trip), NSE transaction charges of about 0.00173 percent per leg (roughly Rs 60 total on this turnover), SEBI charges, stamp duty on the buy leg of 0.002 percent (about Rs 35), and 18 percent GST on brokerage, transaction and SEBI charges. Total costs land somewhere around Rs 520 to Rs 560 for the round trip. Your net profit is therefore roughly Rs 22,500 minus Rs 540, which is about Rs 21,960. Costs are small relative to a winning trade but become very significant when you trade frequently or scalp small moves.

Lot Sizes and Notional Value of Popular Contracts

Lot size determines how much capital each contract controls and how much each one-point move is worth in rupees. Because the rupee value of one point equals the lot size, a Bank Nifty point is worth Rs 15 and a Nifty point is worth Rs 75. Exchanges revise lot sizes periodically, so always confirm the current contract specification on the NSE site before you trade. The notional values below use illustrative index and price levels.

The practical lesson is that Bank Nifty, despite a higher index level, moves in larger point swings, so a single lot can show a four-figure profit or loss within minutes. A trader sizing positions should think in terms of rupee risk per lot (points of stop-loss multiplied by lot size), not just the number of lots. This keeps risk consistent across very different contracts.

Tax on Futures Trading in India: It Is NON-Speculative Business Income

This is the single most important correction every Indian futures trader needs. Profit or loss from trading exchange-traded equity derivatives, both futures and options, is treated as business income, and specifically as NON-speculative business income. This is not a matter of opinion. Section 43(5)(d) of the Income Tax Act explicitly excludes exchange-traded derivative transactions from the definition of a speculative transaction. So even though you may be speculating in the everyday sense, the law does not tax your F&O profit as speculative income. A common older article will tell you F&O is speculative business, that is outdated and wrong for exchange-traded F&O.

Why does the speculative versus non-speculative distinction matter so much? Because it changes how you can set off losses. Non-speculative business losses from F&O can be set off against most other income heads in the same year (except salary), and any unabsorbed loss can be carried forward for up to 8 assessment years to set off against future non-speculative business income. Speculative losses, by contrast (for example intraday equity trading without delivery, which IS speculative), can only be set off against speculative gains and carried forward for just 4 years. Getting your F&O classified correctly as non-speculative protects valuable loss set-off rights.

Because F&O is business income, there is no concept of STCG or LTCG and no holding period for it. You do not get the 20 percent short-term or 12.5 percent long-term capital gains rates, and indexation does not apply. Instead, your net F&O profit (turnover minus all allowable expenses) is added to your other business and personal income and taxed at your applicable slab rate. The flip side is that you can deduct genuine trading expenses such as brokerage, STT (now allowable as a business expense), exchange charges, internet, advisory fees, depreciation on your trading computer and a portion of home office costs. Maintain a proper books-and-records trail because the Income Tax Act treats this as a business.

Speculative vs Non-Speculative: Where F&O Sits

It helps to see, side by side, how different Indian trading activities are classified for tax, because traders constantly confuse them. The table below summarises the standard treatment. Always confirm with a tax professional for your specific situation.

Read the table carefully. The 20 percent STCG and 12.5 percent LTCG rates apply to delivery-based equity investments, not to futures. Futures never attract capital gains tax at all. Mixing these up is the classic beginner mistake that leads to wrong tax filings and lost loss set-offs.

Costs and Charges That Erode Futures Profits

Futures look cheap because there is no upfront premium, but several charges accumulate on every trade. For futures, STT is charged at 0.02 percent only on the sell side of the turnover. On top of that you pay brokerage (often a flat Rs 20 per executed order at discount brokers), NSE exchange transaction charges, SEBI turnover fees, stamp duty on the buy side, and 18 percent GST levied on brokerage plus exchange plus SEBI charges. None of these is large in isolation, but for an active intraday futures trader doing many round trips a day they add up to a meaningful drag.

• STT: 0.02 percent on sell-side turnover for futures (different from options, where STT is 0.1 percent on the sell-side premium).
• Brokerage: typically flat per order at discount brokers, percentage-based at full-service brokers.
• Exchange transaction charges and SEBI turnover fees: small percentages of turnover, charged both legs.
• Stamp duty: charged on the buy side only, at a small percentage of turnover.
• GST: 18 percent applied on the sum of brokerage, exchange and SEBI charges, not on STT or stamp duty.

A useful habit is to calculate your break-even move per lot, that is, how many points the contract must move just to cover round-trip costs. For a Nifty lot, total round-trip costs of roughly Rs 520 divided by Rs 75 per point means the market must move about 7 points in your favour before you are even. Scalping tiny moves rarely survives this maths once frequency is high.

Futures vs Options: Key Differences

Both are derivatives, but their risk profiles differ sharply. In a futures contract, both parties have a firm obligation and the profit or loss is linear and potentially unlimited in both directions. In an options contract, the buyer pays a premium for the right but not the obligation to buy or sell, so the buyer risk is capped at the premium while the option seller takes on large risk for a limited reward.

Because a future has no premium cushion, an unhedged futures position with no stop-loss can lose far more than a long-options buyer ever could. This is exactly why disciplined risk management, covered next, matters more in futures than almost anywhere else in the market.

Risk Management and Common Mistakes

The leverage that makes futures attractive is also what ruins most beginners. The most frequent mistake is sizing positions by what the margin allows rather than by what the account can afford to lose. Just because your broker lets you carry three lots does not mean a three-lot loss is survivable. Decide your maximum rupee risk per trade first, usually a small percentage of capital, then convert that into a stop-loss in points and a number of lots.

• Always predefine a stop-loss in points before entering, and convert it to rupee risk by multiplying by lot size.
• Respect daily MTM: an adverse close debits cash that evening, so keep a buffer above the minimum margin to avoid a forced square-off.
• Square off single-stock futures before expiry unless you genuinely intend to take or give delivery and have the funds for it.
• Avoid averaging into a losing futures position. Leverage turns a bad average into a margin call quickly.
• Track every cost. Frequent trading of small moves can turn a gross profit into a net loss after charges.

Regulation and Settlement Under SEBI

Futures trading in India is supervised by SEBI, which sets margin rules, mandates daily mark to market, registers brokers and clearing members, and monitors open interest so no single entity can corner a contract. Clearing corporations act as the central counterparty, guaranteeing settlement so you do not bear the credit risk of the trader on the other side. This institutional structure is what makes a standardised, anonymous, liquid futures market possible.

On settlement, remember the split once more: index futures are cash settled at the final settlement price on expiry, while stock futures are physically settled through delivery of shares. SEBI has progressively tightened intraday leverage and introduced peak margin reporting, so the effective leverage available to retail traders today is lower and more conservative than it was several years ago. Always confirm current margin and contract rules on the official NSE and SEBI sites before trading.

Sources and Further Reading

For authoritative contract specifications, charges and tax rules, refer to NSE India, the Income Tax Department and SEBI. Lot sizes, margins, STT and tax rates change over time, so always confirm the current rules and contract specifications on the official source, and consult a qualified chartered accountant for your own tax position before you trade.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, Income Tax Department and SEBI (Securities and Exchange Board of India). Always confirm current rules, rates and contract specifications on the official source before you trade.